Observations by an academic researcher on the use of “open”-ness as a competitive strategy, with a particular interest in coping with the commoditization of information goods and technologies in an Internet-enabled world.

Tuesday, April 15, 2008

Attempts by the California government tax iTunes downloads have failed, if only temporarily.

To avoid painful cuts, state legislators are looking everywhere for new sources of revenue. Democrat Charles Calderon introduced AB 1956 to tax digital downloads, but to avoid the Proposition 13 requirement (for a 2/3 vote on new taxes), tries to impose the tax through a reclassification.

The bill stalled (died?) in the Assembly Revenue and Taxation committee Monday. The only publication to report on the story was the Merc, who said the bill got only 4 votes (one Democrat voting no, one abstaining) and needed five. Since the committee had 6 Democrats and 3 Republicans, presumably this meant a vote of 4-4-1, with all Republicans opposed (but the Merc doesn’t say). There is no official vote in the legislative record, presumably because Calderon has asked for reconsideration to twist more arms to get his fifth vote.

The Board of Equalization believes state and local revenues would increase by about $114 million a year, but Calderon's estimate, which he said includes pornography downloads, is about $500 million.

Some (including Board members in charge of collecting the tax) say that the tax increase will encourage a shift to illegal downloads. One thing it will clearly do is give Apple’s out-of-state competitors (such as Amazon) a price advantage, since from a practical standpoint they cannot be compelled to collect the tax.

Pro-tax politicians consistently underestimate the impact that taxes have upon people’s behaviors — i.e., the steps they will go to to avoid paying the tax. (Remember the “luxury” tax). So even if Apple is a sitting duck for $100 million in download taxes (less whatever market share it loses to Amazon), the expectation value for porn downloads should be zilch. Nada. Zip. If ever there was an industry that will flee state jurisdiction to avoid taxes, this is it.

Perhaps Calderon is being paid off by Las Vegas real estate interests, who need the porn industry to relocate 270 miles northeast to prop up commercial real estate rents. That — or support from Apple’s competitors — is the only logical reason why the state would want to pass such legislation.